Five banks have granted nearly $9 billion in relief to 80,000 California homeowners under the national mortgage settlement. Orange County Register file photo

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Big banks relied on short sales rather than reductions in principal to make a start on their $20 billion national mortgage settlement.

That's the bottom line in a report released Monday by the monitor of a nationwide settlement between five banks, 49 state attorneys general and the U.S. Justice Department.

Bank of America, Ally Financial, Citibank, JPMorgan Chase and Wells Fargo said that from March 1 through Sept. 30 they approved $13.3 billion in short sales, in which banks allow homeowners to sell homes for less than is owed on their mortgages. Nearly half of the short sales, $5.9 billion, were in California.

They completed $7.78 billion in principal reductions or loan refinances with reduced rates, including $2.9 billion in California.

Consumer advocates aren't happy that the short sales push consumers out of their homes.

"I would like to make sure that every eligible borrower is getting considered for a principal modification which allows them to stay in their home," said Paul Leonard, California director of the Center for Responsible Lending, a nonprofit that works on consumer lending issues.

But, Leonard said, it is still early in the three-year settlement. The banks started quickly with what they knew – short sales – and have only begun making loan modifications.

Bank of America, California's top lender, approved loan modifications for 9,771 California homeowners with an average reduction of $210,105 each, UCI law professor Katherine Porter said in a report Monday. Porter was appointed by California Attorney General Kamala Harris to monitor a separate settlement the state negotiated with three of the five banks.

Bank of America and the other two lenders participating in the California settlement, Chase and Wells Fargo, delivered $128 million in principal reductions on 554 loans in Orange County, Porter said.

On paper, the banks have already delivered $21.9 billion in foreclosure relief with an additional $4.2 billion in loan modifications approved or in a 90-day trial period – seemingly more than enough to satisfy the national settlement.

But some forms of relief count more than others, according to the settlement. A dollar of principal reduction is worth $1.25 if it's done by March 1, 2013, the first anniversary of the settlement. And 60 percent of all relief efforts have to involve principal reduction, Leonard said.

"We're seeing a slight shift" from short sales toward loan modifications, said Sasha Werblin at the Greenlining Institute, a nonprofit that monitors lending. "We're expecting to see that trend continue."

The court-appointed monitor, Joseph A. Smith Jr., still must confirm the banks' numbers. He is expected to issue audited numbers in February.

His report says consumers and the professionals who represent them are still finding problems in the ways the banks service loans.

One of those problems is "dual tracking," the practice of simultaneously working on a loan modification and a foreclosure. Many borrowers have complained of getting a foreclosure notice when they thought they were about to get a loan modification.

The national settlement required banks to cease dual tracking as of Oct. 4, which means it should disappear as a source of complaints in Smith's next report.

The settlement says that once a homeowner becomes delinquent he or she has 120 days to file a complete application for a loan modification, Leonard said. Once that application is filed, the bank must process it before it can file a notice of default, the first step in a foreclosure.

The California Homeowners Bill of Rights, which will become law Jan. 1, goes farther. It wipes out the 120-day deadline for a homeowner to file a loan modification form.

The settlement grew out of an investigation by several states into "robo-signing," the alleged use by banks of false affidavits to speed up foreclosures. The investigation ended with the five banks, the largest mortgage servicers in the country, agreeing to grant borrowers relief and to reform their servicing practices.

Despite its sheer size, the $20 billion national settlement probably will do little financial damage to the banks.

That's because the banks have already accounted for most of the losses on theirbooks.

Bank of America, for example, told shareholders in its June 30 quarterly report that it expected to pay $2.4 billion in cash settlement costs. The rest of its nearly $8.6 billion share of the settlement will take the form of credits – non-cash amounts credited to borrowers and others.

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